The FCA is disappointed that none of the firms it assessed as part of a supervision exercise into advice businesses acquiring clients from other firms could “consistently” show clients’ needs were suitably considered.
According to a supervision review report published by the regulator today, the FCA found that, while firms focused on the commercial benefits, they did not focus enough on how clients were impacted by the acquisition.
The FCA undertook a “targeted review” of six firms after identifying nine. It acknowledged the sample used in the report “may not be representative” of the wider market.
In its report, the regulator says that where firms had considered potential disadvantages to clients and designed processes to mitigate these, that approach was not consistent across all of the aspects assessed by the FCA.
It says: “This resulted in a potential detriment for clients whose needs had not been appropriately considered. Our outcomes testing of replacement business did not indicate widespread common themes of unsuitability. However, we did identify individual areas requiring improvement for many of the firms assessed.”
On client communication, the FCA found issues including that details of services and charges for the new firm were not given to clients at the start of the relationship, that differences between the services of the previous firm and the new firm were not explained, and that clients were not told they could opt out of ongoing services the acquiring firms intended to provide.
Clients were also not told how they could complain about advice given by the original firm.
The report says that during the review, the regulator discovered firms had acquired client banks in circumstances where the original client agreement to provide and charge for ongoing services was no longer valid for services offered by the new firm.
The report says: “This was because the original agreement was between only the outgoing firm and the client and so the new firm was not party to it. Where a new agreement was required, firms did not always ensure they had the client’s agreement before arranging for facilitated adviser charges to be redirected to their own bank accounts.”
The review also looked into conflicts of interest, with the FCA explaining that its existing rules require firms to consider whether the structure of the payments offered to vendors in the period leading up to the acquisition could be an inducement to the vendor.
The report says: “The rules also require firms to consider if this payment structure creates bias towards particular investments, putting them in breach of the adviser charging rules. We saw instances where the acquiring firm offered to pay more money when clients held specific investments.”
The FCA says it has provided feedback to the firms assessed in the review and that all firms involved in the project have taken action to improve their practices.